7 Deadly Sins of Buying Contractors General Liability Insurance and how you as a Contractor can finally get the peace of mind you work so hard for!

This report was put together at the request of my contractor clients. I have been talking about the 7 Deadly Sins for years.

Ten years ago, this report would not have been necessary, but times have changed.

Ten years ago a contractor could bid a job, complete the job and move on to the next job. Lawsuits happened just to the next guy. Insurance policies were simple and life was wonderful…..

General liability insurance has changed drastically in the last ten years for contractors and now there are traps… not intentional traps, but changes in the industry that you have to keep abreast of.

This brings us to the 7 Deadly Sins of buying Contractors General Liability Insurance.

DEADLY SIN #1 Choosing The Wrong Agent or Broker

As strange as this may seem, your biggest problem might be your current insurance agent. I am sure he is trying to do a good job, but if he does not handle construction insurance on a day-to-day basis he is out of touch with a marketplace that is changing day-to-day. Keeping up with the construction industry is a full time job.

If your agent is not Independent he may not have the tools Available to do a good job. Non-Independent agents must represent one company only. He may not represent the best contractors insurance companiesfor your business.

Construction claims made policies became popular in the mid 1980’s and have been around ever since. The promise of these policies is lower costs to you. However the claims made policy for contractors can cost you a lot of money if you do not understand how it works.

What is a claims made liability policy and why is it different from what you have now.

First let me describe what triggers coverage in the kind of policies you are used to buying. Contractors have traditionally been insured under what we in the insurance industry call an occurrence policy. The coverage is triggered when an “occurrence” happens during the policy period. Sounds simple and is to a point. An example would be you a contractor is working on a building and damages it. If you have coverage, the company will pay the claim whenever the claim is brought even if the claim is not brought until years later. Another example would be if you injured someone on the job site. The person did not realize the extent of the injury for several years. The policy would cover the claim even if the lawsuit was filed 10 years after the event.

A Claims Made policy has a different coverage trigger. Coverage is triggered when the Claim is officially made; most often a formal request for payment for damages or a lawsuit is actually made to the insurance company or the contractor, or when you report an incident to the company. Sounds simple, it’s not. The Claim must be brought during one of three different time frames.

First

While the policy is in force.

Second

During the 60 day extended reporting period.

Third

During the Supplemental Extended Reporting period or (tail).

The policy period is straightforward. If your policy says that, the coverage is from July 1, to July 1. Then the claim must be made during that time period.

The 60 day extended reporting period is the first 60 days after the policy has expired. An example would be your contractors policy expires on July 1, the company would respond to claims brought against you until August 30th.

The Supplemental Extended reporting period is an endorsement that you, the contractor, can purchase within 60 days of the date that your policy expires. The endorsement in effect says that the company for an extra premium charge agrees to defend and pay any claims that are brought for occurrences that happen during the policy period indefinitely. Believe it or not, this endorsement puts you back into the same position you would have been if you had purchased an occurrence policy as previously discussed. We strongly recommend that if you purchase a claims made policy, that you make plans to buy the extended reporting period or tail. Buying the extended coverage will protect your construction business and your family from financial ruin in some court 10 or even 20 years down the road.

Claims Made Policies and how the Policy Protects You!

1) You the contractor, are building a home, with the home 60% complete one of your employees knocks over a can of something flammable it catches the place on fire. You turn the claim in to the insurance company. Coverage has been triggered. The Claim and the report of the claim happened during the policy period.

2) You the contractor are building a home; a neighborhood kid sneaks onto the property at night and gets hurt. You don’t know anything about it. You change your insurance coverage 30 days later and do not buy the Extended Coverage. The kid’s parents sue you 6 months later. No coverage. The event occurred during the policy period but the claim was not reported to the insurance company during the policy period or during the 60 day extended reporting period. You pay for the defense and any settlements out of your own pocket.

3) You the contractor have a claims made policy for 5 years. During this period of time, you built five homes a year. During the fifth year, the owner of one of the homes you built in the first year files a claim on your insurance for the damage caused by a defective foundation. The event happened during the policy period and the claim was reported to the insurance company during the policy period. The Insurance Company will cover you for the loss under the policy.

4) You the contractor decide to retire and you do not buy the extended coverage. If a claim is brought within the first 60 days of the expiration of the policy. You are covered.

If a claim is reported after the 60 day, automatic reporting period is up and you did not purchase the extended coverage there will be no coverage under this policy; even if the event happened while you were covered. Remember the claim must be reported to the insurance company during the policy period or during one of the extensions. All court cost, lawyer’s fees and any settlement will come out of your retirement.

Another term that is used is the “Retro Date” The retro date is most often the day the contractors policy is first put into force. If an event happens before the date the policy starts, there is no coverage. In fact, the traditional contractors policy or occurrence policy works the same way. So why mention it. When you leave one insurance company who is selling a Claims made policy and move your insurance to another company who is selling a claims made policy. You can ask the new company to use the date of the inception of your first claims made policy as a Retro Date and then you do not have to buy the tail or extended reporting period. The new insurance company would assume the responsibilities for any claim you might have happened, but it has not been reported yet.

How Insurance Companies Rate Claims Made Policies Forms.

When a contractors insurance company begins to offer Claims made coverage, they know that in the first year the number of claims will be small. In fact, there is little chance that any claims would be brought up before the end of the policy year. Some claims take five or more years to show up. Because of this, most companies have a step increase in the rates. As the insurance companies potential for claims increases they increase the rates. The rates will continue to increase until the company considers risk mature. After that, the insurance company will vary rates based on the overall loss history of all of the contractors involved, the loss history of the individual contractor and the various outside factors that raise the cost of doing business.

If you want to leave that insurance company and go to another insurance company you will have to purchase additional insurance to cover you for the next 10 years…that’s right 10 years! Why? Because the law allows customers to file a lawsuit for construction problems up to 10 years after the project was completed.

I generally recommend to my contractor clients that you purchase the traditional occurrence form policy. Take time after reading this report to look for your policy and see if your current policy is either an occurrence form or claims made.

DEADLY SIN #3 Insurance Company Rating

Insurance Companies are given a grade; just think about the grades you received in high school or college. A,B,C,D,F. Insurance companies are given a financial report card by the A.M. Best Company and Standard & Poor’s.

A contractors insurance company with less than a “B” rating can be a potential problem for two reasons, 1. There is a risk of the company going out of business and 2. If you work for the state, county or city, they will usually not accept any company less than a “B” rating. Also if you hire on as a subcontractor most general contractors will not accept any rating less than an “B”. With some state government offices and general contractors not accepting your liability insurance, you will be limited to the type of jobs you can accept.

If you do not know your Company Rating feel free to call my office at any time, we will be glad to look it up for you.

Risk Retention Groups:

In the last 5 years several groups have set up a quasi insurance company called risk retention groups, Pro-builders is such a group. Usually you buy a membership to be insured by the company. The rates may or may not be less. The real trick with this type of group is to understand where the money comes from and if the company is in the contractors insurance business for the long run. Remember anything you build today you can be sued 5 to 10 years down the road. You want to be with a contractors insurance company that will be around for the long run. Fortunately the rating companies do rate risk retention groups.

DEADLY SIN #4 Exclusions

First off let’s get one thing clear… All policies have exclusions. You hear terms like all risk, special form, comprehensive, full coverage. Those phrases do not mean there are no exclusions.

In a contractors general liability policy all the exclusions are listed on the (Dec) front page of the policy or on the second page of the policy. The problem is that they are usually listed by form number, not by name.

In order to make sure you understand the exclusions, look at the form numbers on the front page and go find that form (by number) in the policy. (Usually the form number is in the bottom left hand corner)

If you see a form number on the front of the policy but you cannot find that form in the contractors insurance policy, your policy is not complete! Someone forgot to add that form to the policy when the policy was put together. People make mistakes! If you find a form number on the front of the policy and cannot find that form in the contractors policy Call your insurance agent and ask them for the missing page(s). It may be a very important exclusion.

The exclusions are critical, when you get a proposal for contractors insurance the first thing you should look at are the exclusions.

For instance, if you are a concrete contractor and you do house pads, if you have exclusion for foundation work in your policy you have a problem. The worse thing is you will not find out about your problem until you have a claim and it is denied, by then it’s too late. Here is a list of exclusions I have found in many policies; this list is by no means "all inclusive".

Look over this list and see what exclusion would apply to your operation.

DESIGNATED WORK

Claims arising from any classification or class code not listed on the declaration page of this policy. For example: You are a roofing contractor and you get a quote that is 50% less than all other quotes. The policy comes in and your company is classified as a landscape contractor. Any claims will be denied because you were not classed correctly.

INDEPENDENT CONTRACTORS

Claims arising out of: The acts or omissions of independent contractors while working on behalf of any insured, or the negligent hiring or contracting, investigation, supervision, training, retention of any independent contractor for whom any insured is or ever was legally responsible and whose acts or omissions would be excluded. If you use subs, this exclusion can be a killer.

ASBESTOS

No Coverage for exposures to asbestos, asbestos fiber, or any material containing asbestos or asbestos products, including without limitation, the costs of asbestos removal or damage in the course of effecting such removal (Very common exclusion)

PROFESSIONAL LIABILITY

Claims arising out of the rendering of or failure to render any professional services by you or any engineer, architect or surveyor who is either employed by you or Performing work on your behalf in such capacity.

Professional services include: The preparing, approving, or failing to prepare or approve. Maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings; and Supervisory, inspection, architectural or engineering activities. For example, if you make a structural change without the architect's approval, there is no coverage. (Very common exclusion)

Construction Management Errors

* See Professional Liability

CONTRACTORS WARRANTY

This means that if you hire sub contractors, you must get a certificate of insurance from them. If you do not, the amount of your contract with the sub will be added to your payroll or gross receipts and you will be charged. In other words you will pay for the subs general liability. Some companies use a stricter version of this. They require the sub to have the same limits of insurance as you do.

FORMALDEHYDE

Claims arising directly or indirectly out of formaldehyde whether or not the formaldehyde is airborne as a fiber or particle, contained in a product, carried or transmitted on clothing contained in or a part of: any building, building material, insulation product or any component part of any building.

X, C, U

Explosion, collapses, and underground. Not a good exclusion for Grading, Excavation contractors.

CLAIMS IN PROGRESS

* See Prior Claims

KNOWN LOSSES

* See Prior Claims

ROOFING

Some roofing exclusions are plain and simple. NO ROOFING. Some are not as strict. You must read the exclusion carefully. Some roofing exclusions say there is no coverage while the roof is under construction or repair. For example: You tore off a roof, since the weather forecast called for sunny skies you decide there is no need to cover the roof overnight. It Rains… There is no coverage. Read all exclusions carefully.

DEMOLITION

Plain and Simple, No demolition.

YEAR 2000

Computer failure to recognize the year 2000.

SUBSIDENCE

Insurance does not apply to any liability arising out of Landslide, Mud Flow, Earth Sinking, Earth Rising or Earth Shifting.

LEAD

Claims arising out of the actual or alleged presence or actual, alleged or threatened dispersal of lead, lead particles or products containing lead.

EARTH MOVEMENT

* See subsidence

NUCLEAR

* Self Explanatory

MULTI UNIT RESIDENTIAL

Any work in connection with the pre-construction, construction, post-construction, reconstruction, exterior remodeling or repairs of any multi-unit residential building.

This is a very severe exclusion. This says that any work you did prior to the policy date is not covered. For contractors this can be a death sentence on all prior work. 99% of all contractor claims occur years after building was built.

Exterior insulation and finish system

Exterior insulation and Finish system means the design, manufacture, construction, fabrication, preparation, installation, application, maintenance or repair, including remodeling, service, correction, or replacement, of an exterior insulation and finish system (commonly referred to as synthetic stucco) or any part thereof, or any substantially similar system or any part, including the application or use of conditioners, primers, accessories, flashing, coatings, caulking or sealants in connection with such a system when performed by you.

Pool Pop Up

The elevation of swimming pool due to high water table.

FOUNDATION WORK

Claims arising our of foundation work, including but not limited to the design, specification, inspection, construction, installation, repair, replacement, improvement or reinforcement of any foundation or any part of a foundation. Foundation means the entire substructure below the first floor or frame of a building, including but not limited to any footings, footing beams, piers, grade beams, pilings, pilings or supports upon which the building rests.

DEADLY SIN #5 ??? Title Needed ???

Certificates of contractors insurance what do they do and why do you need to provide them to general contractors, government agencies, customers, etc.? A Certificate of Insurance shows you or your company is insured. Many general contractors ask for them from there subcontractors , but never take the time to even look to see if the insurance certificate is current. Listen there are few key items you need to look at when you get a Certificate of Insurance or even provide one to someone else.

1) Make sure the effective date of the contractors insurance policy is current. You would be surprised how often the term of the policy will be listed incorrectly or maybe a year old.

2) Check the contractors insurance company name, listen a lot of companies no longer insure contractors. If you don’t recognize the insurance company name pick up the phone either call your agent or my office at 866-376-2510 and we will tell you if that the insurance company still insures contractors or if they put an endorsement or exclusion on their policies that in effect transfer all the construction liability back to you.

Contractors Additional Insured’s: Many Certificates of Insurance show additional contract wording or endorsements attached to your insurance policy. Additional Insured endorsements for contractors are the most common contract language added to your general liability policy.

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Additional Insured Endorsement (CG2018 11/85 ) when is an additional insured endorsement not an Additional Insured Endorsement? There are many kinds of Endorsements with different language. The CG 2010 11/85 has become the Additional Insured Endorsement of choice. Many general contractors and others will not accept any other certificate. You must be very careful here, most contractor insurance companies now charge for these certificates anywhere from $100 - $1,000 each. If the costs of these new insurance certificates are not in your bid you’re losing money.

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Primary Endorsements – along with the above Additional Insured Endorsement, many people are asking for primary endorsements, 99% of all contractors insurance companies have an additional charge for these as well, mostly from $250- $1,000 each.

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Waiver of Subrogation – Another endorsement that has become popular. This is seen more in contractors Workers Comp but does come up in contractors General Liability. There is an additional charge for this endorsement.

DEADLY SIN #6 Subcontractors This is potentially a killer

I have seen dozens of construction companies go out of business on this subject alone within the past 10 years. It’s usually your best friend or someone you were just trying to help out.

When you hire a subcontractor to do work for you, he must carry General Liability insurance and he must have the same limits of liability as you do. For example, if you have a General Liability insurance policy with a $1,000,000 limit the subcontractor that you hired must also have the same.

What happens if your subcontractor does not carry general liability insurance? The problem arises when your general liability company comes and audits your books at the end of the year. If you do not have a Certificate of Insurance for the subcontractor your general liability company will add it to your payroll and You will end up paying the general liability for the subcontractor who did not buy it.

I can hear you now…It’s not fair…. fair or not, it’s in the insurance contract. Let’s look at the insurance company’s side on this subject. If there is a problem on the job, whom is the customer going to sue? He is going to sue the subcontractor and the General Contractor. The insurance company has no recourse against the subcontractor and must defend the entire lawsuit, while the subcontractor walks away. Now, I do not expect you to have sympathy for an insurance company, but now you know how it works.

But the costs to you do not stop at the price of your contractors insurance. The state of California may rule you have an employee and not a sub-contractor. If that is the case you will be responsible for workers compensation coverage, back payroll taxes, both state and federal, along with penalties etc. Not to mention fines and a potential lawsuit.

Now you know why I call it the Best friend or the someone you were Trying to help out killer. You feel sorry for them – And you pay the price.

DEADLY SIN #7 Admitted vs. Non-Admitted Companies

Admitted Construction Insurance Companies are companies that are licensed in the State of California and contributes to the California Insurance Guarantee Fund.

The California Guarantee Fund is a pool of money set aside by the State of California. Everyone who buys General Liability insurance in California is charged a percentage of his or her insurance premiums to go into the pool. This pool of money is set aside to handle claims by people in the State whose Insurance Company cannot pay their claims. The California Guarantee Fund will pay claims if there are no other companies to pay claims. If there are other companies to pick up the claim, the California Guarantee Fund will not share in the claim.

Non-Admitted companies do not contribute to the California Guarantee Fund’s pool. If a Non-Admitted company goes out of business, you have no recourse….

Non-Admitted companies are not necessarily a bad deal. They fill a gap in California and provide competition for the Contractor business. However if you use a Non Admitted insurance company with a bad financial rating you might be asking for trouble.

I caution you to ask your agent for the financial status of the company he or she is placing your insurance with. If the agent tells you they don’t know and they can not find out ….get a new agent. The person your doing business doesn’t know the construction insurance business, you are paying them (commission) to know what they are talking about and if they don’t find a new agent who does.

Whether you are looking for information on General Liability Insurance or looking to get a free quote, We offer the best rates for General Liability Insurance in Wendel California.